'Sanitization' is the removal of malicious data from user input, such as form submissions
or maybe more simply...
The cleaning of user input to avoid code-conflicts (duplicate ids for instance), security issues (xss codes etc), or other issues that might arise from non-standardized input & human error/deviance.
Depending on the context, sanitization will take on a few different forms. Could be as simple as removing vulgarities & odd symbols from text to removing SQL injection attempts and other malicious code intrusion attempts.
You can get the idea of what Sanitization is generalized to drupal core by looking at:
For instance, the check_plain() function will:
Encode special characters in a
plain-text string for display as HTML.
Also validates strings as UTF-8 to
prevent cross site scripting attacks
on Internet Explorer 6.
or filter_xss() which:
Filters an HTML string to prevent cross-site-scripting (XSS) vulnerabilities.